Gross Income: Concepts, Inclusions, and Exclusions
Scope of gross income
IRC §61 defines gross income broadly as all income from whatever source derived, including compensation for services, interest, rents, royalties, dividends, annuities, and income from discharge of indebtedness. Glenshaw Glass adds the judicial test: an undeniable accession to wealth, clearly realized, over which the taxpayer has complete dominion. Loans, returns of capital, and mere fluctuations in value before realization are not income.
Common inclusions
- Wages, salaries, bonuses, commissions, tips, and fringe benefits not excluded.
- Interest, dividends, rents, royalties, annuities, and pensions to the extent taxable.
- Business profits, farm income, gambling winnings, prizes and awards, illegal income, and found property.
- Discharge of indebtedness income under §61(a)(11), subject to §108 exclusions such as bankruptcy, insolvency, qualified farm indebtedness, qualified real property business indebtedness, and principal residence debt.
- Below-market loans and bargain purchases, measured by forgone interest or the bargain element.
- Jury duty fees, unless remitted to the employer.
Common exclusions
- Gifts and inheritances under §102, but not employer gifts to employees under §102(c).
- Life insurance proceeds paid by reason of death under §101(a), with transfer-for-value limits.
- Amounts received for personal injury or sickness under §104; emotional distress is excluded only to the extent of medical expenses.
- Employer-provided health insurance under §106; municipal bond interest under §103; welfare benefits; Social Security only partially under §86.
- Scholarships under §117 for tuition, fees, books, and supplies for a degree candidate; room, board, and travel are taxable.
- §132 fringe benefits: no-additional-cost services, qualified employee discounts, working condition fringes, de minimis fringes, and qualified transportation benefits.
Worked example
An employee receives $6,000 of employer-paid tuition for a course that maintains skills in her current job, a $500 birthday check from her aunt, and a $1,200 state income tax refund from a year in which she itemized and received a full tax benefit. The tuition is a working condition fringe under §132(d) and is excluded because it would be deductible under §162. The aunt’s gift is excluded under §102. The refund is included under the tax benefit rule because the prior deduction reduced her tax. Gross income is $1,200.
Traps
- Assuming every gift is excluded; employer gifts are not.
- Missing that scholarship room and board is taxable.
- Excluding punitive damages or emotional distress damages beyond medical costs.
- Forgetting that debt relief is income unless a §108 exception applies, and that excluded COD income usually reduces tax attributes.
- Treating a loan or a return of capital as income.